Make Sure Your Retirement Assets Last As Long As You Do

Congratulations. Your diligent savings habits and frugal lifestyle during your working years have paid off, and now you're retired.

The challenge now is to ensure that your savings last as long as you do.

"In retirement, every penny counts because it's irreplaceable," says Douglas Gill, a Certified Financial Planner and president of Gill Capital Management Inc. in Dallas. "In your working years, you can always earn another paycheck."

With today's life expectancies, it's conceivable that you can live more than a decade after you retire, so you need to prepare for that.

"One of the biggest mistakes I see is people not realizing that they're going to live longer," says E.W. "Woody" Young, partner at Quest Capital Management in Dallas, a financial-planning firm. "Today's advances in medicine have allowed us to live longer, which means our assets need to be properly positioned and properly managed. These assets need to be preserved for at least 20 years."

First, make a list of expenses you'll have in retirement. They'll be different from those in your working years.

Your gasoline bill might fall because you won't be driving to work. And your dry-cleaning bills might drop because you won't have work clothes to clean.

"It is really easy to think you spend a certain amount on food, insurance, gas, utilities, clothing, etc., per month," says Trudy Turner, a Certified Financial Planner at Rench & Muir Financial Advisors Inc. in Denton, Texas. "To project for adequate retirement expenses, you need to know as close as possible what your expenses will be."

She suggests going through your bank account registers to determine the average amounts paid for monthly expenses.

"This method will also remind you of nonmonthly expenses that need to be added to your budget, such as annual insurance premiums, semiannual homeowners dues, annual real estate taxes, or home and auto maintenance."

Have your emergency fund tucked away so that if investment markets fall, you won't have to sell out at lower prices for money to live on.

"They should consider having a certain amount of money in money market funds or bonds so that when we do have a downturn in the market, they're able to keep their equity positions intact so that when the market does rebound, they're able to participate in the rebound," Turner says.

Crucial to protecting your money is insuring yourself against a health catastrophe. This is a major worry for retirees as fewer corporations are providing retiree medical benefits.

"It's critical, and a lot of people simply don't understand what they're in for," says Derrick Kinney, a senior financial adviser at American Express Financial Advisors in Arlington, Texas. "The company that pays it [retiree health benefits] in its entirety is the exception to the rule. Now, they [consumers] have to go out and shop, and it may cost $400 to $800 a month, depending on the individual policy."

You may have some coverage under Medicare, the federal health insurance program for the elderly, but it doesn't pay for everything. In that case, Medigap insurance, which is a health insurance plan that fills in the insurance gaps of Medicare, would come in handy.

"The important thing there is for retirees to always be evaluating their medical needs so they don't drain them," Gill says.

It is essential to consider long-term care insurance or some way to pay for long-term care because its costs can wipe out your savings in a hurry.

"That's one thing that people don't talk about until the subject comes up," Kinney says. "One of the best ways is to structure your investments so that some of the income off those investments will pay that [health care] premium for you. Once you're retired, you want to keep those fixed expenses as low as possible."

Don't overlook the twin enemies of retirees: inflation and income taxes.

"Structure the retirement portfolio so you are providing the hedge against inflation long term and you are paying the very least amount of tax you can on your cash flow," Gill says. "In retirement, tax is one of your biggest expenses, along with medical care."

Many retirees feel that all their money has to be in conservative investments because they can't afford to lose that money. However, that leaves their money wide open to attack by inflation.

"When inflation erodes the purchasing power of that income stream and you've fixed your portfolio at an 8 percent cash yield, you will run into a deficit because your income is fixed but your expenses aren't fixed," Gill says.

So keep some money in stocks because in order to generate a stream of income that grows with inflation, your investment returns have to exceed the percentage you're withdrawing.

The trick is to work it so that as your investments rack up gains, they don't end up costing you bucks in taxes.

"In a taxable account is where you want to own stocks so that when you produce gain there, it's only taxed at a 20 percent rate [the capital gains rate]," Gill says.

And income, such as investment dividends and interest, is best in a tax-deferred account because they're taxed at ordinary income tax rates, which could be as high as 39.1 percent for this tax year.